Greetings, welcome to the Dutch Bros Q4 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paddy Warren. Please go ahead. Good afternoon, and welcome. I'm joined today by Joth Ricci, CEO, and Charley Jemley, CFO. We issued our earnings press release for the Q4 and year-end December 31, 2022 after the market closed today. The earnings press release, along with the supplemental and information deck, have also now been posted on our investor relations website at investors.dutchbros.com. Please be aware that all statements in our prepared remarks and in response to your questions, other than those of historical fact, are forward-looking statements and are subject to risks, uncertainty, and assumptions that may cause actual results to differ materially. They are qualified by the cautionary statements in our earnings press release and the risk factors in our latest SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. We assume no obligation to update any forward-looking statements. We will also reference non-GAAP financial measures on today's call. As a reminder, non-GAAP financial measures are neither substitutes for, nor superior to, measures that are prepared under GAAP. Please review the reconciliations of non-GAAP measures to comparable GAAP results in our earnings press release. With that, I would now like to turn the call over to Joth. Thank you, Paddy. Good afternoon, everyone. We appreciate your continued interest in Dutch Bros. In 2022, we delivered another year of growth with 133 new shop openings system-wide, a testament to our team's ability to execute our proven strategy. Despite the well-documented economic disruption, we've exceeded our new shop development targets for the third consecutive year and have now doubled our shop count since March of 2019. Although we continue to see signs of broader economic uncertainty, we enter 2023 well-positioned to continue building market share and execute against our long-term goal of 4,000 shops over the next 10-15 years. As we look forward, I'd like to share a few points that underscore why we feel confident in our long-term positioning. Our drive-thru model is focused on speed, quality, and service. Our goal is to be the highlight of our customer's day, which we believe helps cultivate lasting relationships. More than 95% of our sales are beverages, which we believe leads to more daily repetition than if we were serving food. We enjoy high AUVs without the supply chain and operational complexity of a restaurant. Our menu evolves to consumer preferences. More than 80% of our beverages are cold, which enables high levels of customization and can service several day parts. We are particularly excited about the category growth of energy drinks and encouraged by our positioning within this competitive market. We have now opened at least 30 system-wide shops in each of the last 6 quarters, demonstrating the strength of our people systems and development pipeline. In 2023, we are targeting 150 new shops, which positions us to achieve our 5-year goal of 800 system-wide shops by year-end. We will be within striking distance of $1 billion in revenue in 2023 and 1,000 system-wide shops by the H1 of 2025. This inspires us and excites us. We know this growth creates jobs and opportunities for our employees in the communities we serve. Our new shops continue to be efficient, demonstrating predictable and attractive shop-level economics, and they mature quickly. The group of shops opened in 2019, 2020, and 2021 are approaching our 30% year 2 contribution margin target, and the class of 2022 is maturing in line with our expectations. We are hitting these targets while we continue entering new trade zones across the country. This performance gives us confidence in Dutch Bros' growth strategy, both in the near term and beyond. That said, we enter 2023 with opportunities to optimize our operations. We're rolling out a beverage tap system, which we believe will achieve both supply chain and beverage build efficiencies. We're also eyeing the further penetration of our Dutch Rewards and Dutch Pass programs. Here are a few updates on the five key objectives we shared as we started our public company journey. One was to continue to attract and develop people who are our growth capital. Two was to open new shops wherever people want great beverages with an eye on 4,000 shops in the next 10-15 years. Three is to increase brand awareness and encourage deeper customer engagement. Four was to invest in and use technology to improve the customer experience. Five is to expand consolidated margins through operating leverage. Let's focus on our people. Earlier this month, we welcomed Christine Barone as our new president. We are thrilled she is on board and already getting up to speed. Christine will be instrumental as we take this business to the next level. In Q4, our shop level and management turnover remained below industry averages, and our shops were fully staffed. Shop-level turnover improved about 3% quarter-over-quarter and sits in the mid-70% range. Shop manager turnover remains in the low double digits, and operator turnover was once again virtually nonexistent. We know employee satisfaction takes on many aspects beyond wages. However, we strive to ensure take-home pay is competitive. In Q4, we increased wages in select markets. On January 1st, 2023, we made a proactive investment in our people and increased wages across all jurisdictions that rely upon the federal minimum wage as their standard. Across all markets, we continue to have a strong applicant pool with far more people interested in working at Dutch Bros than available employment opportunities. To be clear, our investment in wages in 2023 is proactive, not reactive. Dutch Bros utilizes a grow from within model. In 2022, we promoted more than 2,500 people in the field, up from 1,700 in 2021. These promotions create compelling opportunities for our people across our organization. This growth and continuity in our ranks allows us to scale our culture and consistently deliver our unique brand of customer service as we enter into new markets. To help manage our people development, we maintain a qualified operator candidate pipeline. We match internal candidates with growth opportunities as operators. Last year, we had about 200 qualified operator candidates in this pipeline, and we promoted 34 new operators from this list. The qualified candidate list has now grown to more than 275 individuals, demonstrating that our people pipeline is well ahead of our needs. Having such a deep bench is encouraging, especially as we look forward to another expected record year of unit growth in 2023. Now to shop development. In 2019, we began accelerating the company-operated growth model with a deliberate expansion outside the Pacific Northwest. We continue to be pleased with new shop performance. The AUV for our mature shops open since 2019 is $2.1 million, approximately 25% higher than for shops opened in 2018 and prior. Since 2019, we have executed a variety of new market entry strategies, including fortressing. Our fortressing strategy allows us to saturate a market, entering quickly and going deep to develop scale. Going deep helps us manage the considerable demand we often see when we enter a new market. If we do not manage this demand skillfully, we risk allowing long lines to disrupt our customer and crew experience. Making sure our customers can efficiently and predictably navigate our lines is key to Dutch Bros' long-term success. In 2022, we executed our fortressing strategy and about 70% of our new shops were infill, most notably in Texas. We believe the Texas market is a key long-term growth driver for Dutch Bros. Over the last 24 months, we have opened almost 100 locations in Texas, creating adequate supply to satisfy long-term demand as we build our powerhouse brand in the Lone Star State. For 2022 openings, annualized weekly sales were $1.8 million. This falls in our sweet spot, balancing volume and customer experience considerations. We remain confident in new shop AUVs as we continue to expand into Texas and the Southwest and Southeast. In 2023 and beyond, we plan to continue utilizing both deep and wide development strategies as we craft our holistic portfolio. This balance helps us saturate markets and positions us to capture large market share while quickly moving into new territories and planting the Dutch Bros flag. In 2023, we look forward to entering Alabama and Kentucky. This morning, we announced changes to our Dutch Rewards program. By almost all metrics, this program has been an unqualified success. Beginning on or after March 27, each dollar spent at Dutch Bros will result in Rewards members earning 3 points instead of the current 5 points. This adjustment should help us better align redemptions with current pricing levels and ensure the long-term health of the program. The changes preserve the value of customer points earned to date. We are not changing the amount of points required to redeem a complimentary beverage. Instead, given the rise in menu prices in the past 18 months, we are adjusting the go-forward points earning rate. We believe those moves should create some headroom, enabling us to provide more targeted and customized offers to loyal customers while allowing us to better focus on key initiatives. Our Dutch Rewards program continues to grow as well. In Q4, approximately 64% of our transactions came from Dutch Rewards members. We believe there is a runway to expand this program, especially in newer shops. Our shops opened since 2019 have about 5% lower rewards penetration compared to our shops opened before 2019. In 2023, we plan to continue promoting the benefits of preloading funds and paying through the app. From an operational perspective, this is great for customers as it helps speed up line time. In Q4, we executed a promotion to encourage users to load funds, which doubled the daily average of loads. We look forward to implementing similar promotions going forward to introduce more customers to the ease and simplicity of paying in our Dutch Rewards app. We are excited to announce the launch of the Dutch Bros Creative Collective, a leading-edge grassroots effort that empowers our employees to capture the Dutch Bros story. The Creative Collective allows us to move away from relying on models and agencies and instead partner with baristas to create social media and marketing content our brand continues to show up in a very authentic way. Our employees have always been the true source of our marketing power by providing incredible experiences at the window and reinforcing our unique culture. This program puts them in the driver's seat while creating compelling futures for talented creators in our system. Let's talk about technology. We are investing in technology to improve both barista and customer experiences. In Q3, we added functionality for Dutch Pass users to share rewards in the form of free drinks. In Q4, we launched digital gift cards so our rewards members can share the good vibes and treat their friends and loved ones to Dutch Bros. In 2023, we look forward to implementing systems that enable us to move faster, make better decisions, and remove non-value-added tasks. Finally, we are committed to expanding margins over time through operating leverage. In Q4, we saw 940 bps year-over-year contribution margin expansion in our company-operated shops, increasing to 28.5%. Operational improvements in pricing contributed to this year-over-year increase. Charley will provide additional details in his comments as the portion of this margin improvement is related to our initial breakage estimate booked in Q4. In Q4, adjusted G&A was 19% of total revenue, 120 basis points improvement from Q4 last year. We expect G&A leverage to continue in 2023 and beyond as our revenue growth outpaces the G&A investments we need to support rapid growth and scale our business. As we complete our first full calendar year as a public company, we are encouraged by the acceptance of our new shops as we expand eastward. Our people systems are strong. Our 2023 development pipeline is fully loaded. We saw meaningful company-operated shop contribution margin expansion in Q4 and continued G&A leverage. Looking towards 2023, despite the larger macroeconomic noise, we remain focused on our unit growth plan. 4,000 system-wide shops in 10-15 years. We feel that our four-wall model will support our long-term ambitions. In closing, I'd like to thank our operators and our franchisees who are at the front line of executing this every day and all of the people behind the scenes supporting these efforts. The beauty of this business is that it flexes and changes with the times. Over the last 30 years, we have moved and adjusted, and over the next 30 years, we will continue to do the same thing. As a team, we maintain a long-term focus and are excited about our future. Now I'd like to turn the call over to Charley to review our financials. Thanks, Joth. Here is a quick recap of Q4 financial results. Quarterly revenue surpassed $200 million for the first time, growing 44% compared to the same period in 2021. Adjusted EBITDA more than doubled compared to the same period in 2021, and total company-operated shop contribution margin was 28.5%, up 940 basis points year-over-year. Recall that this contribution margin of 28.5% includes 220 basis points of pre-opening expenses. In Q4 2022, for the first time since launching the Dutch Rewards loyalty program in early 2021, we were in a position to recognize breakage. In late 2021, we notified customers that points earned in 2022 onward would expire in six-month increments and that points earned prior to 2022 would be grandfathered in with a one-year expiration. Going forward, given this backlog is behind us, we expect expirations will be more modest. In terms of the impact of breakage, note the following. Q4 company-operated shop contribution margin was approximately 210 basis points higher as a result of the breakage recognition compressed into the quarter. For the Full Year 2022 results, company-operated shop contribution margin was $4.9 million higher as a result of the 2021 expirations only, or an impact of 50 basis points. Let's move on to new shop performance. When we assess performance, a key aspect is achieving a company-operated shop contribution margin of 30% in the second year of a shop's operations. Despite all the headwinds we faced in 2022, we are on track with this objective. We have 172 company-operated shops in the class of 2019 and after that we consider mature as they have reached margin efficiency and moved past their initial pre-opening expenses. In 2022, these shops achieved a 29.4% contribution margin, which, as a reminder, includes all the disruption we discussed earlier this year. Please refer to slides 7 and 8 in the supplemental presentation we post on our investor website for more details around margins in our newer shops. While we are moving very quickly, the reliability of new shop margin performance reinforces confidence in our decision to steadily increase the pace of company shop development. The combination of a solid four-wall model and a growing company-operated shop base positions Dutch Bros to fund growth with cash flow from operations within a few years. Because of extensive fortressing, reported comps are weighted down by sales transfer, and we're mindful of that as we assess the underlying revenue performance of the business. That said, it is still important that we walk you through the metrics. Q4 system-wide same shop sales decreased 0.6%. Better than our expectations, given the challenging lap we had from strong results in the prior year. The challenging lap from the prior year of 10%+ comes in part due to less impact related to Omicron's disruption relative to many of our peers. It is notable that Q4 2022 same shop sales were 16.2% higher than 2019's pre-pandemic levels. The -0.6% result includes an estimated 130 basis points of impact from sales transfer, well within the expectations of our fortressing strategy. Company-operated shops experienced an estimated 160 basis points of sales transfer. At the current pace of development, our modeling targets a range of 200-300 basis points of company-operated sales transfer impact for 2023. Moving on to recap 2022. 133 new shops opened on top of 98 in 2021. Revenue grew 48%, driven by the strength of new shop openings and positive same shop sales. AUVs for our mature shops opened since 2019 were $2.05 million, and our estimates of going forward annualized average weekly sales for the 2022 class are currently $1.8 million. We aim to create a diverse and well-positioned portfolio. AUVs of shops in some markets will be higher, particularly when the pace of development is slower due to local market conditions, but also lower in some cases when we can move opportunistically in executing our fortressing strategy if advantageous local market conditions are in place. In 2022, we generated $739 million in revenue and $91.2 million adjusted EBITDA. We are pleased with this outcome, having successfully navigated so much uncertainty in 2022 as rising inflation took a bite out of our company shop margins, particularly in the H1 of the year. 2022 was really a tale of two halves. While both halves had similar revenue growth, adjusted EBITDA declined 32% in the H1 but recovered to grow 66% in the H2. H1 was marked by rapidly rising costs. For example, dairy rose 25% year-over-year, and it makes up about 30% of our ingredients basket. We elected to take a measured approach to menu price increases during the year. Maintaining a loyal and healthy customer base who views us as a good value for the money is paramount. We respect the need to deliver a profitable model, but short-term margin compression was something we were willing to absorb, particularly given we entered 2022 with healthy margins. In the H2 of the year, we began to close that gap between the cost environment we had experienced and menu prices. Adjusted EBITDA grew 66%. Cash flow from operations also quickly rebounded in the H2. We achieved $60 million for the full year, generating more than 70% of that or $43 million in the H2. In our franchising and other segment, gross profit moderated to $15.6 million compared to $17.7 million in the same period last year. In Q4 2021, we recovered approximately $2 million of bank fees from Dutch Rewards transactions paid by Dutch on behalf of our franchisees to expedite bringing the program to market. Excluding that Q4 2021 item, profit in the quarter was flat to prior year, indicating we have now stabilized the profitability of this segment after absorbing inflation in the first eight months on the products we sell to our franchisees. Shifting now to SG&A. For the quarter, SG&A was $50.6 million and includes $10.7 million in stock-based compensation. Adjusted SG&A was $38.1 million and continues to decline as a percent of revenue to 18.9% for Q4 2022 compared to 20.1% Q4 last year. We expect continued SG&A leverage going forward as anticipated revenue growth outpaces the growth in costs associated with people and infrastructure investments. Please refer to page 12 of the supplemental slides for a reconciliation between SG&A and adjusted SG&A. A few comments on the health of our balance sheet and liquidity. At year-end, we had $191 million of net debt, or about 2x adjusted EBITDA. This was an increase of $39 million in Q4. We had $287 million of undrawn liquidity on our $500 million credit facility. Our balance sheet remains well capitalized and capable of supporting growth. It's our objective to grow quickly, scale the business, and exit the decade debt-free or shortly thereafter. Our long-term financial projections support this outlook. Finally, on to 2023 guidance. For the Full Year 2023, we're issuing the following guidance. Total system shop openings are expected to be at least 150, of which at least 130 shops will be company operated. Total revenue in a range of $950 million-$1 billion. same shop sales growth is estimated to be in the low single digits. At this point in time, our objective is to avoid taking any additional menu pricing in 2023. Despite an uncertain consumer environment and our present desire to avoid additional pricing, we are cautiously optimistic for 2023 and estimate adjusted EBITDA to be approximately $125 million. Please note this includes approximately $8 million in proactive investments in labor related to increases in wages in federal minimum wage markets. This is in addition to approximately $11 million of increased labor expense from legislative wage increases in non-federal minimum wage states. Our wage structure indexes to local market conditions. Capital expenditures are estimated to be in the range of $225 million-$250 million, which includes approximately $15 million-$20 million for a second roasting facility which we project will open in 2024. Thank you. Now we will take your questions. Operator, please open the lines. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. As a reminder, please limit to one question. If you would like to remove your question from the queue, please press star two. It may be necessary to pick up the handset before pressing the star keys. Your first question comes from David Tarantino with Baird. Please go ahead. Hi. Good afternoon. Charley, I was interested in learning a little bit more about the factors underpinning the profit outlook for 2023. I know you mentioned the labor investments, but could you help us frame up what you're assuming for contribution margin at the shop level? I guess, you know, separately or secondly, I was hoping that you could maybe elaborate on why you're not pricing against some of that inflation at this point. Thanks. Okay. Hi, David. Thank you. On the shop contribution margin, with all the puts and takes, we expect that to be flat. We have wage investments, as I noted in my comments, 2 big items. That'll essentially be offset by the Rewards refresh benefits we talked about. There are other inflationary costs as we absorb a full year of those things that happened in 2022, in 2023. At this point, we are not pricing in any big movements in our commodities at this stage. Let me get to your second part of your question. Yeah, hang on just a second. Oh, the pricing piece. Yeah, sorry. I think we're all aware of where our traffic trends are right now and what the consumer's been through. At this point, given that we just refreshed rewards, we take prices in typically in 2 windows, in the spring and the fall. We just made the rewards move. It wouldn't be appropriate for us to make a pricing move at this stage. Also just looking at where our consumer is, we'd like to be able to absorb all these changes without rising prices in 23 and let the consumer environment settle down. It's really important that we maintain a good value for money position in our business and not look at that on a short-term basis. Got it. On that rewards program change, I guess, can you elaborate on what the financial impact of that would be? Presumably, it'd be less of a discount, but you mentioned some opportunities to reinvest, you know, behind that. I guess, how should we all think about the P&L implications of that move? It starts out as lower discount promotion costs, as we will bring the cost of the program back to what we originally intended it to be, given we've had a lot of menu price increases. Points earned will go lower, as we mentioned, from 5 points to 3 points. That has an effect on discounts going forward. Joth talked about in his comments that what we'd like to do is really move to the next phase of our rewards program and do more targeted incentives and offers to customers to get them to try different things and experience new things. We're going to spend a fair portion of that back in incentivizing particular things for customers. Got it. It's also important to note, David, that we announced this today, but you won't feel the impact of it until the Q2 onward. Yep. Understood. Thank you very much. Thank you. Next question, Sharon Zackfia with William Blair. Please go ahead. Hey, thanks for taking the question. I guess first question, could you give us an update on initiatives that you have to improve efficiencies or speed, within the box and maybe unlock some increased throughput? Secondarily, Charley, I think you are running maybe 10% of price in the Q4. Maybe I had that mistaken, but it just seems like you'd be carrying more price residually into 2023 than the low single that I think was in the press release. Can you walk us through what price you roll off when this year? That'd be helpful. Thank you. Why don't you take price, and then I'll do the rest. Yeah. The price rollover for the Full Year of 2023 is approximately 4% that we'll carry over. Yeah. I'm sorry. There's also... If you're... sorry, Sharon. If you're trying to map to the low single-digit comp number, that we guided to, you've got positive pricing rollover, but you've also got the sales transfer piece to factor in. Okay. Thanks for that. Sharon, the list of operational improvements are long. Let's maybe, let's touch on a few key ones. One is, we've discussed tap systems and implementation of tap systems at Dutch Bros. We have, we started with a test in a single shop in the Q4 of 2022. We've just launched five new locations in Texas, where we're testing in San Antonio and another one in Dallas. We expect, you know, everything from production to delivery, to back-end inventory To the speed of drink making, to the quality of the product as we hand it to the customer, we believe that every one of those shows improvement. We believe that probably at the next quarter, we'll be able to start to share what we think will happen in metrics related to tap system implementation. The other big one is around, you know, rewards. We did just announce the changes to our point system, but really big unlock continues for us to be our Dutch Pass program and the loading of dollars and continuing to work with our customers to load more dollars into Dutch Pass. If we can get more people to pay with Dutch Pass, we can remove the unnecessary part of the transaction, which is fumbling around with a credit card or cash, and just make it a quick scan of a QR code and move through the line. You know, those are the two big unlocks that we know really help, will really affect the business short and long term. Then I know the team's working on several other smaller, you know, operational improvements to continue to work on speed. Next question, Chris O'Cull with Stifel, please go ahead. Hi. Thanks. Good afternoon. Charley, you pointed out in your presentation that last year was a tale of two halves. I was hoping you could maybe help us understand how we should think about the cadence of comp and shop margin performance as you progress through the year? Yeah. Comp will be more front loaded as we roll over, as we carry over the pricing from 2022. Full Year 4%, it'll be 0 rollover by the Q4. If you think about the cadence of margin, you're making those labor investments immediately that we mentioned, so you'll feel the margin impact of that on a sequential basis in Q1. The rewards refresh comes in to create some recovery around that, and margins will normalize from the Q2, Q3, and Q4. What we think we're going to see in the business is a more normal seasonality curve to our margins from Q1 to Q4 being our lowest seasonality, Q2 to Q3 being our highest seasonality. 2022 didn't follow that shape because of all the inflation in the H1 and then us catching up on prices in the H2. Okay. That's helpful. I believe you said you're assuming new stores open at $1.8 million in annualized sales. I think the stores have been opening at higher levels. I'm just curious why not build in a higher volume into the projection? I didn't know if maybe you were seeing anything in terms of variability by geography that caused you to be more conservative. Yeah, no. It wasn't that we're assuming 1.8 going forward. It was that our recent class of stores was averaging $1.8 million, our latest class of 22 stores, whereas the prior classes had averaged about $2 million. That was the distinction we made in our comments. Okay. Sorry, I misheard that. Thank you. The actual results. Yeah. Next question, Andrew Charles with Cowen and Company. Please go ahead. Great. Thanks. Jeff, can you talk about how you tested the Dutch Rewards accrual changes? You know, just given how young the program is, you're just curious what gives you confidence that the changes, won't drive a sour customer reaction? Well, I think that. You know, as we, as you know, as we've been talking from the day that we started this program, you know, we were really on a journey of, you know, the year one for Dutch Rewards was about, you know, launching, gathering, understanding consumer preference, what that was all about. Year two, we spent a lot of time with testing, iterating, understanding at the market level and the individual customer level, how they have responded to points. We did several different promotions that we, you know, we incented the customer with different point levels, and actually, we saw that in many cases, lower points drove the same type of behavior as higher points. Really year three, I think we can define it as execute and refine. As we think about that, we're now taking really the learnings over the last couple of years, and all of the data points that I think our team has looked at to have confidence in how we take the 5 to 3 program, how we have basically maintained the free drink offering with points that are in the bank, and now we basically move forward to basically, it's a price-adjusted program. You know, we're not too concerned about the change there and feel like we think this is fair to the customer. We think this is fair to the initial program that we launched in 2021. Got it. That's helpful. My other question, Charley, is for you. Just, you know, with the 2023 adjusted EBITDA guidance, this might be semantics, but the slides call out at least $125 million in adjusted EBITDA in 2023. Totally get, you know, obviously the labor investments you guys are being proactive on, but just trying to think about if I bridge to consensus, you know, where is perhaps the conservatism guidance, you know, within just the slides calling out $125 million plus? You know, is it around those flat shop margins? Is it around potentially G&A? You know, is it sales based on year-to-date performance? You're just trying to better understand the flex as do we try to bridge the consensus numbers. Yeah. Some of the flex is we're not pricing any commodity upsides. We're watching dairy prices closely. You know, those have come down a little bit, we don't feel it's wise to take that to the bank, until We see it set in and be real. We're making about a $5 million investment in our technology platforms, all of the platforms across the business on a year-over-year basis. That's part of the factor. I think you just take the additional wages that we built in, the $8 million move, and that's really outside the scope of what we normally would have to do, and the fact that we're being careful not to price. You can pretty quickly walk yourself up to a number beyond 125, and why we've been thoughtful about investing and careful about how we guide. We don't want to come back to you. Makes sense. Thanks, guys. Thank you. Next question, Sara Senatore with Bank of America. Please go ahead. Great. Thank you very much. Quick question on the accounting for the breakage, then I'll have a a more in-depth question on the new units and how to think about marginal returns. Just so I understand the breakage, was that a tailwind to comp, and so you basically just have this top line that has no cost associated with it, and that's why it was a boost to margins? I'm just trying to think about normalized margins in that context. I guess if I step back on the marginal returns to the business, you know, CapEx is going to be a bit higher than we may have thought. You're being, I think, appropriately conservative on EBITDA, but new unit volumes are perhaps a bit lower than they were. I guess, you know, is there anything that's structurally different? Is there any reason to think that, you know, the economics that you've talked about in the past no longer apply? Just trying to understand, you know, how much of this is transitory versus, just, you know, what it means to be growing in new markets. Thanks. Thank you. On the rewards accounting, it does not affect comps, but to the point you made, it is in the revenue number and in the profit number. $4.9 million, and we disclose this in the release, is related to a lot of sign-on points and things that we gave, offers we gave back in 2021. We distinguish between that. The best way to look at it is the way we put it in the release for 2022. That prior year piece was about 50 basis points if you normalize for that. In terms of your question around the go-forward cost structure, you know, our objective was to get a weighted 30% cash return on a ground lease, right? That's the most severe return we have when we have to build the entire unit ourselves. At those $2 million AUVs in our margins, we were well in excess of that 30% return. I think as we look at things potentially moderating, meaning the cost side going up, we saw double-digit build cost inflation. We'll probably continue to see double to mid-double digit inflation going forward. That will eat into some of the excess return we had in our investment thesis. We still believe, and our numbers tell us, that the strong four-wall model we have, the high margins we have, is able to absorb any punishment from build costs in the near term. Okay. Thank you. Just the 1.8 versus the 2, is that because of the infill, more of the infill, more new markets? Is there anything to pay attention to that? We are going deep, especially in Texas, where we've had some opportunistic places where we can build out very quickly. One particular market in 12 months, we opened 14 shops. We see some of that. It's also the portfolio. It depends on the timing when shops open. Sometimes we have high volume California, Arizona shops weighting in. In the Q4, we had less of that and more of the deeper penetrating markets like the Texas markets we went in. That'll ebb and flow over time. Understood. Thank you so much. Next question, John Ivankoe with JP Morgan. Please go ahead. Hi. Thank you. The question is on labor, which is actually down quite a lot relative to our expectations, both on the percentage of sales and a per operating week basis. Could you talk about what, if anything, changed in the Q4? Is that your go forward model for labor? I understand traffic would have been down, but did you find some efficiencies on labor in the system in the Q4, you know, that really do make sense going forward? I'd also like to ask about hourly turnover and also hourly tips as well, if I can. Thanks. Hey, John. I see the same numbers you're looking at. In the Q4, there were 4.5, about 450 basis points of improvement in labor from Q4 this year to last year. It's really three things. There's clearly a lot of pricing. If you look at one of the aspects of our cost structure that has some fixed costs in it, the way we staff our shops, labor allows us to do that. We also really worked hard this year to do our staffing better, to take out overtime, dramatically take out overtime 'cause we're so well-positioned and so well-staffed, so we got some good leverage out of that in productivity. Going forward, something similar to this will stick because we have made all of these improvements in how we operate. Having said that, we're also going to have the wage investments that I noted. You'll see, you'll see us come off of this number that we developed and that we delivered in Q4. In the Q1, watch that number, it's going to go back up because of the wage investments that we just announced. Can I ask about hourly turnover and also the level of hourly tips? Yeah. Hey, John, it's Joth. What's your question? The level of hourly turnover year-over-year, I mean, I know at one point it was going up and, you know, tips were actually going down at one point for the employee level. I mean, if those are stabilized or if that's still something that you're looking at? Yeah. Q4 turnover actually is down about 300 bps from it was in Q3. Kind of stabilized in that mid-seventies range. What's interesting is that November and December monthly turnover was the lowest that we've had in the last 19 months. We're definitely seeing, continue to see a strong labor impact, you know, across our shops, which I think is a really good sign. From a tip standpoint we're, you know, we think that tips is actually, it's stabilizing. Non-federal minimum wage states are actually showing a slight increase in recent quarters. A lot of the tip noise that was out there seems to have settled down in the Q4 and obviously we're tracking that closely as we get into 2023. That's great. Thank you. Next question, Jeff Farmer with Gordon Haskett. Please go ahead. Great. Thank you. On the labor investments and mandated minimum wage increases, I just have a couple of follow-up questions. The first would be, what level of blended wage inflation does this equate to in 2023 across the 2 increases? I can talk in margin points. I don't have in front of me the exact percentage increase, but it's about two margin points. The combination of both those will be about two margin points. Okay. Just again, thinking forward on this, you know, theoretically you'll find some mandated minimum wage increases appearing again in 2024. Is this just a dynamic where we're going to see more of these increases as we move forward, or was this a specifically unique year in that you guys decided to actually raise wages in the federal minimum wage states, which again, that's at your own discretion. Is just 2023 going to be an outlier year in terms of size of wage rate inflation, or is there more to come in terms of what's mandated out there in 2024? Okay. Separate the two things which you've done in your question, which is the proactive thing we're doing with wages in federal minimum wage states. We wouldn't expect that to continue beyond this year. There's always going to be wage escalation, but that sharp move we made is a one-time move. The mandated wage escalation is going to continue, to your point. It's going to continue onward in a similar fashion. The unusual situation I would say against that is typically we would've used pricing moves to pay for part of that, and because of other factors we talked about, we're really trying to get through 2023 without having to take our prices up. Going forward, 2024, 2025, you would expect us to absorb some of that through normal price increases and productivity. Okay. Just one more follow-up. I believe this one will be a little bit more straightforward. You guys had said on commodities not much movement, I think was the quote. It's been touched upon on this call, but exactly what does that mean for dairy and coffee in terms of inflation for both of those commodities for you guys in 2023? The slope of the increase has definitely slowed down, if you reflect on 2022, the sharp rise in the H1, we're planning a full 12 months of those higher costs first of all, right? Versus a less than 12 months impact in 2022. We are seeing dairy come down, but it's not, it's not been there long enough for us to really take that to the bank, and dairy is the biggest piece of this, you know, frankly. That's our view is annualizing over a partial year of inflation. That's a reality for us. Hope is not a strategy, but some hope that dairy moderates downward and we get some upside out of that. I apologize, just one more follow-up. I appreciate you guys giving me some latitude here. You, This is the last one. You mentioned $5 million technology investment. I'm just curious if that shows up as capitalized or as expense. How does that show up on the P&L, the balance sheet? Where are we going to see that $5 million tech investment? In the SG&A line. Okay. Appreciate it. Thank you. Next question, Nick Setyan with Wedbush Securities. Please go ahead. Thank you. I wonder if you could just break down the transaction growth versus the average check in the quarter. So here's the decomp on Q4 same shop sales. I mentioned -0.6% reported. I'll use some round numbers to make it easy. +11% on menu pricing, -1% from estimated sales transfer. That was actually 130 basis points. -1% from higher discount promo costs. 2% mix shifts notable. We didn't see any sizing trade down there. It's just a mixture of goods that we sold. What's left is the 7% underlying negative traffic. Q3 was -3%, but on a reported basis, Q4 was we decelerated. So more negative traffic. We also want everybody to understand we're lapping an amazingly good Q4 2021. It was our best quarter in 2021. That's very helpful. Thank you. You know, just given, the really solid January and February to date, you know, data across the industry that we're seeing in terms of the top line trends, any early commentary around how Q1 has started? I think one thing to remember that's different about Dutch is how we've reacted to the various virus events. We largely stayed open through the episodes in the winter of 2021 and the winter of 2022. Open meaning we were fully staffed and operating. Much of the data you're seeing from a rebound perspective is something we won't have. We won't have a rebound because we never had outages related to that. Our lap is what it is because we didn't go down in those episodes. We've seen some negative weather impacts, especially as we come out to the West Coast in December this year and right now. We're not going to see that Omicron bounce, we call it, that many of our peers will see in Q1. What's going to happen in Q1 is we will start to move through the March period where we talked about last May that was a difficult period for us, so we may see some better sales lap in the back half of March. Okay, that's very helpful. In terms of just the change, in the loyalty, any way to quantify the lesser discount going forward starting in Q2? Yeah. It'll ramp. It'll start to flow through the P&L in Q2, and build in and peak in Q3. We're looking at about 100 to 200 basis points of margin improvement that'll come through that. Now we talked about investment we're using. We're paying for that with this benefit, right? Not taking price. Understood. Just last question and clarification. You know, when you said, and I think you said that again earlier in the call in terms of paying for the labor investment with this, you know, change in the loyalty program, should we take that as across the entire company margin or labor can be flat year-over-year? Well, there's two labor pieces, right? There's the wage floor piece that we talked about, the $8 million, then there's $11 million in minimum wage. I would say that if you take the, if you take the rewards refresh, the value of that, less the spend back we're going to do on it, we're still not going to cover that wage investment. Okay. Understood. Thank you very much. No, obviously. Once again, if you would like to ask a question, please press star one on your telephone keypad. As a reminder, please limit to one question. Your next question comes from Gregory Francfort with Guggenheim Securities. Please go ahead. Hey, hey guys. Thanks for the question. I had two. I know I should only be doing one, but the first was just do you have a rule of thumb on what G&A should be growing as a portion of revenue either in 2023 and the out years, just as we think about that? Then my other one is just Christine's role and her coming in, what responsibilities do you think she's going to take over and what do you expect her to focus on in her early days as president? Thanks. Yeah, thanks for that. It's Charley. What we're trying to do right now is drive that adjusted SG&A number, and you can see the reconciliation in our release, down below 18% in 2023. When we went public in 2021, that number was almost 24%. So thinking about it, right? We want to drive that percentage down, which means of course, we want G&A to grow slower than the rate of revenue. Ultimately, how slow it grows down the road, don't want to get locked into that, but do want to lock into driving that number below 18% in 2023. I think it's a great tie-in to the question about Christine 'cause, you know, I think that for us, Christine will run all the day-to-day operations of the business. Everything from our retail team to marketing efforts to ops, to our operating team, to people systems, and really executing the really our AOP. The thing that we looked for in Christine, and we really feel like we've landed the best candidate in the country for this job, was we wanted somebody who could look out, who has been through a larger operating business like this and be able to build our systems to scale. The number that Charley speaks to is a key component to how we'll continue to grow and execute the business at scale. We look at, you know, some of our other peers in the industry and understand some of the numbers that we'd like to get to long term. Christine's ability really to come in, look at the business as a big picture, lead our team so that we can be big and be small at the same time, are important aspects. Really executing every day, driving the rewards program, building out AUVs, hitting the new shop program, driving our operating and logistics systems behind the scenes to be able to serve across 4,000 locations long term, and then building people systems to really operate at a, you know, with employee base that runs between 50,000 and 75,000 people. I mean, those are all things that we will rapidly be getting to if we follow our growth plan correctly. S he's got the experience to do that. Thank you. Thank you. I would like to turn the floor over to Joth Ricci for closing remarks. Thank you. For more than 30 years, Dutch Bros has been in the business of building and nurturing relationships. We have all the building blocks to remain a successful and enduring company while creating real value for our shareholders. These attributes include a powerful, authentic brand, strong people systems that drive company culture and fuel our sharp growth, a highly engaged customer following, customizable and uniquely curated beverages, a highly consistent and highly attractive unit level economics, a portable model that is successful across geographies, a strong and well-capitalized balance sheet that provides ample liquidity, and an engaged co-founder and an experienced leadership team. For our investors, thank you for your time, and as always, the continued support of Dutch Bros. Thank you, everybody. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.